A due-on-sale clause is a stipulation in a mortgage or deed of trust requiring a borrower to pay the entire loan balance upon the sale of the property securing the mortgage. Banks and mortgage lenders use due-on-sale clauses to prevent the buyer of a property to assume the current mortgage at the original interest rate. Buyers of a property with a due-on-sale clause in the mortgage must negotiate a new interest rate.
Deeper definition
Most due-on-sale clauses require you to obtain prior written consent from your lender before you transfer any interest in your property. Mortgages with due-on-sale clauses are not assumable, which means the buyer of your property cannot assume, or take over, your current mortgage. However, if someone inherits your property and plans to live in the property, your bank or mortgage lender cannot enforce the due-on-sale clause. The 1982 Garn- St. Germain Act also states that mortgage lenders cannot enforce the requirement if property ownership changes due to a legal separation or divorce.
Lenders use the due-on-sale clause in a rising interest rate environment. If a bank feels it can make more money on a mortgage by requiring the buyer of the subject property to obtain a new mortgage with a higher interest rate, lenders will sometimes enforce the due-on-sale clause. Banks also use the due-on-sale clause if they feel the property that secures the mortgage is at risk. However, lenders rarely exercise the due-on-sale clause since mortgage interest rates are much lower than the period when the government passed the law establishing the provision.
Is a mortgage loan assumable or not? Learn more today.
Due-on-sale clause example
If you transfer your property through a quitclaim deed or try and sell your home without prior written consent from your lender, the bank can foreclose on your property leaving you with the burden of paying the loan in full. The bank or lender will then report the foreclosure on your credit report, making it almost impossible to qualify for a new mortgage loan.
Learn the importance and the difference between a quitclaim and warranty deed.